Getting the Best Rates on Currency Conversions

2014-04-18Foreign currency exchanges at the airports and in tourist areas give you the worst rates. Find out which forex platforms offer the best rates.

Currencies, like gold and other commodities, are very liquid, but it would be very foolhardy not to shop around for them.

Converting from one currency to another involves paying some third party a premium for the service, which is usually included in the buy (ask)/sell (bid) price spread. Obviously your goal is to pay the smallest premium, or tightest spread, when converting between currencies.

Currency exchange rates are commonly extended to the fourth decimal place, or “pip.”

Shopping for the smallest currency exchange premiums is somewhat similar to how one should shop for gasoline, which despite being a very liquid and fungible commodity can sell for as much as a 5% difference between two adjacent gas stations.

While a bit of advance planning can save you some money when buying gasoline, utilizing the best way to convert your currencies for large transactions can save you a lot more money.

You should always be looking for what are called the buy price (ask price), which is the price you will pay, and the sell price (bid price) which is the price you will receive when you sell, and the difference between the two, which is called the spread. If there are other commissions or administrative charges that are not included, you must adjust the quoted prices accordingly.

Source: Oanda

Currency exchanges at the airports and even banks in tourist areas are perhaps the worst places to convert your cash. At currency exchanges at the Johannesburg airport in South Africa for example, one pays an administrative fee and a commission on top of a poor exchange rate. The end result is that one can commonly lose you around 15% of one’s purchasing power.

It would be an error to think that only exotic places and uncommon currencies offer bad exchange rates.

So what are the options?

Bitcoin has been much talked about for the ease with which money can be sent from one place to another and converted at minimal fees. This is contrasted with how banks and money transfer services (MoneyGram, Western Union, etc.) impose heavy charges. But if you compare apples to apples, it is indeed possible to move your currency around and to convert it to another currency with virtually no commission and no spread, without resorting to a mechanism like Bitcoin.

Forex trading platforms allow you to convert and transfer your money for minimal charges and are perhaps the best way to do so.

You may want to consider Interactive Brokers as a forex platform (but do shop for other forex trading platforms in your jurisdiction). You can do all sorts of currency conversion with Interactive Brokers, and it has extremely competitive spreads. For certain currency conversions involving the US dollar, the spread can be smaller than 1 pip (1/10,000th of dollar or 0.01%). Moreover, you can execute limit orders.

These spreads are attractive considering most banks operate at a spread of about 2.5-3%. This means that you lose about 1.5% of your value in each transaction if you use a bank. Credit cards commonly charge a 3% premium for foreign currency transactions. A non-banking currency exchange in a non-tourist area will likely convert your money for a much better price, at a spread of 1% or less.

One drawback to Interactive Brokers is that it has a minimum activity fee of $10 per month, which means that if you don’t otherwise generate $10 in commissions for it per month, the company will charge you $10.

An alternative to Interactive Brokers is EverBank, which offers a convenient platform to perform similar transactions with foreign currencies. EverBank’s spreads are generally higher than Interactive Brokers’, but it doesn’t have a minimum monthly activity fee.

In Vancouver, VBCE has some of the better rates for major currencies; shop for similar ones in your local area. To test how good the rates are, look for the spread. My favorite place to check current exchange rates is XE.com.

At VBCE, to convert Canadian dollars into US dollars at the time of this writing, the spread is 1.9%. Converting to a less-traded currency becomes more problematic.

To convert Canadian dollars (CAD) into HK dollars (HKD) for example, the spread as of this writing is 5.4%, despite the fact that the HKD is pegged to the USD. So you’re likely better off converting your CAD to USD before you depart Canada and then converting USD to HKD when you are in Hong Kong.

As you go down the currency list on VBCE, you’ll find that the spread increases as the currency gets more exotic. For Danish currency, the spread is 7%; for the Brazilian real it’s 17%; and for the Egyptian pound, it’s 13%. In each of these cases, you’re better off converting your Canadian dollars into US dollars and then converting them into Danish kroner or Brazilian reais at your destination. Similarly, to get Turkish lira in VBCE, the spread is about 12%. In Istanbul, however, the farther you walk away from the tourist areas, the more the spread drops. At the last shop that I had the interest to walk to, the spread with the USD was only 0.2%.

In general, you’ll likely get better spreads by carrying cash in USD (or perhaps euros) and then converting it to the host country’s currency in a non-tourist area when you arrive. Once you’re at your destination, figure out the best places to convert.

In Hong Kong, it would be worth your while to go to a currency exchange in the non-touristy Chungking Mansion in Kowloon. Similarly, Mustafa Center in Little India in Singapore will likely get you the best exchange rates. There are no fixed rules, except that you should shop around.

In countries where people are desperate to convert their money into US dollars, you should look for opportunities to find a guy on the street to convert your money, as is the case in Argentina where the black-market exchange rate is currently much higher than the “official” rate fixed by the government.

My biggest reason for writing this was to show you how to save you money by being smart with your currency conversions.

Jayant Bhandari is constantly traveling the world to understand it and to look for investment opportunities, particularly in the natural resource sector. He advises institutional investors about his finds. He also runs a yearly seminar in Vancouver titled “Capitalism & Morality.” Find him at www.jayantbhandari.com.